Horizon Technology Finance: As Good As BDCs Get – Horizon Technology F…


On July 31, Horizon Technology Finance (HRZN) reported its Q2 results, with net investment income of $0.29, which beat estimates by $0.01 and total investment income of $7.31 million, which beat estimates by $0.32 million. Furthermore, that same day they declared a $0.10 dividend payable on October 16, November 15, and December 14. In light of these reports, it is worth looking at Horizon Technology Finance as a prospective investment.

Company Overview

Incorporated in 2010, Horizon Technology Finance is a business development company, or BDC. BDCs are closed-ended investment firms which invest in companies which are either smaller in size or unable to obtain financing otherwise. Horizon Technology Finance lends to and invests in sectors such as healthcare information, life science, and technology. They also make secured loans to companies in their target sectors which are backed by venture capital.

Image taken from Horizon Technology Finance.

Horizon Technology Finance is externally managed by Horizon Technology Finance Management LLC, an advisory firm which is responsible for the management of its day-to-day operations and also responsible for provision of the administrative services needed for those operations to be carried out.

Horizon Technology Finance is headquartered in Farmington, Connecticut and it has a market capitalization of $123.62 million.

Competitive Advantage

Horizon Technology Finance has considerable experience in the capital markets – while the company was only incorporated in 2010, it has invested in excess of $1.2 billion into more than 200 companies since 2004. They have been able to successfully operate through the Great Recession, which is testament to its durability.

As of the end of Q2, Horizon Technology Finance holds a portfolio of warrant and equity positions in seventy-seven portfolio companies, but this apparent diversity is undermined by how concentrated it is in the sectors it focuses on.

Industry Percentage of Portfolio
Healthcare Information 6%
Life Science 27%
Technology 67%

Having such a large amount of exposure to technology, which is an inherently unstable sector to invest in due to its rapidly-changing nature, is a cause for concern here. However, there is also a possible reward here from the potential growth of the technology firms which Horizon holds positions in.

Horizon’s revenue and net income figures appear promising until we get to 2016 and 2017.

Year Revenue ($) Net Income ($)
2013 26.13 million 3.51 million
2014 27.68 million 15.43 million
2015 29.46 million 11.86 million
2016 25.21 million -4.91 million
2017 4.59 million 9.59 million

The quarterly results for 2018, however, do give grounds for optimism.

2018 Quarter Revenue ($) Net Income ($)
Q1 7.03 million 2.6 million
Q2 7.3 million 3.3 million
Total 14.33 million 5.9 million

Some quarters within this period showed misses in earnings per share and revenue, and these shortfalls contributed to the lower figures during that time. This can be attributed to weak interest income caused by rising pre-payments which reduced the size of the firm’s loan portfolio. However, this has not had any long-term impairment on Horizon Technology Finance.

One indication of this is the dividend record: since January 15, 2013, Horizon Technology Finance has paid its shareholders regularly monthly dividends. Though the dividend was cut in November 2016 due to the reduced loan portfolio, it still yields 11.17%, which is still extremely desirable. And going forward, the loan portfolio will become more of an asset, as rising interest rates will enable Horizon Technology Finance to generate more profit from the loans that it makes. The dividend is thus secure, particularly as it has $234.1 million in total assets against $94.075 million in total debt, with $$6.594 million worth of cash on hand.

Why such a high yield? BDCs are classified as regulated investment companies, or RICs, for tax purposes. This requires them to distribute 90% of their taxable income to shareholders. Thus, profits are not subject to double-taxation, they are only taxed at shareholder level. They are essentially ‘pass-through’ entities much like MLPs, and it is this structure which enables Horizon Technology Finance to offer such a large dividend yield.

Valuation

Currently, Horizon Technology Finance is trading around the $10 range with a price-to-earnings ratio of 14.49, a forward P/E ratio of 9.26 and offers a dividend yield of 11.17%. Both the P/E ratio and forward P/E ratio are lower than the stock’s five-year average P/E ratio of 21.76, lower than the capital markets industry average of 21.48 and lower than the S&P 500 (SPY) of 24.42. While the dividend yield is slightly lower than the five-year average yield of 11.21%, the stock does seem undervalued at this time – is that the case?

Earnings per share over the past twelve months was $0.74, and EPS growth over the next five years is projected to be 5.00% annually. Using an 11% discount rate – the stock market average – I calculate fair value for Horizon Technology Finance to be $12.95. The stock is undervalued by 17%.

Final Thoughts

Horizon Technology Finance is not without risks – despite the diverse number of its portfolio companies, the sectors within which those companies operate is very concentrated. However, the high dividend yield, lengthy track record, and prospect of rising interest rates make Horizon Technology Finance a worthy candidate for income investors seeking monthly dividends from a BDC.

DISCLAIMER: The author is not a financial professional and accepts no responsibility for any investment decisions a reader makes. This article is presented for information purposes only. Furthermore, the figures cited are the product of the author’s own research and may differ from those of other analysts. Always do your own due diligence when researching prospective investments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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